Take Profit: A take-profit order (T/P) is a type of limit order that specifies the exact price at which to close out an open position by booking a profit. If the price of the security does not reach the limit price, the take-profit order does not get filled.
Take-profit orders are the most efficient way of executing a trade and taking the human element out of managing an open position and very popular with short-term traders who monitor daily or even hourly price moves.
Stop loss: No one wish to lose money when they’re playing in the market. Thus it is important to set a floor for your position in a security. This is where stop loss comes in. A stop-loss is designed to limit an investor’s loss on a security position.
By using stop loss and take profit orders in tandem you can control the risk Vs reward ratio of any trade you enter.
Basics of a Take-Profit/Stop loss:
Take-profit orders/Stop loss is executed at the best possible price regardless of the underlying security’s behavior. On the other hand, If the security could start to breakout higher, but the T/P order might execute at the very beginning of the breakout and Stop loss might get executed even at small market fluctuation, resulting in high opportunity costs.
Take-profit/Stop loss orders are best used by short-term traders interested in managing their risk. This is because they can get out of a trade as soon as their planned profit target is reached or the price drops to the acceptable loss, these traders do not risk a possible future downturn in the market. Traders with a long-term strategy do not favor such orders because it cuts into their profits.
How to use Take profit and Stop loss?
You simply have to take note of how much you are willing to lose or gain and set them accordingly, right? Speaking technically, yes. But without proper research on how to book profits in trading, it’s likely that you will miss out on the majority of gains.
Stop loss and take profit orders may seem very easy to learn but they are quite hard in practice. They require months of learning about technical analysis. This is when a trader need to look at charts of different assets, and through calculations with different formulas determines when a currency pair can reach its peak price, and when it could possibly decrease too much.
Most traders usually go for stop-loss orders only in the beginning. This helps them experience the market much more even though they lose a bit for not placing take profit orders.
It’s important to remember that no matter how confident you are about the trade, a profitable trade position can go bad within seconds, and a small loss can turn into a large one in just a fraction of minutes. Stop loss and take profit are simply unavoidable tools to use when trading.
Moving on to placing stop loss and take profit, we will first try to understand types of setting them.
Types of Stop loss/Take profit:
Final words:
Do not forget Take profit/Stop loss is an important trading tool in your rich trading portfolio. Stop-loss prevents you from losing too much of your investment in one trade. Take profit helps you to lock-in what you’ve already earned. They are very beneficial to you because the market is very unpredictable. At one moment everything might seem favorable for you and in another, it could start falling without any reason.
Moreover, you’re not always near your computer, so you can’t close trades that have caused loss. A stop loss would close them for you and prevent your account from taking too much damage.
Rely on it in order to get better control of your deals and emotions. It may take some time to learn the basics of SL/TP orders but when it is done, you are left with another must-have trading skill so start practicing it now.
Happy trading!
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